Q1 2020 Earnings Call

We are confident that strong Capital coupled with a reputation for Superior customer service and relationship banking will serve as well in in these unprecedented times with all that said highlights for the quarter excluding the effects of the 2.2 million-dollar pre-tax mortgage servicing rights impairment include net income of 2.4 million approximately 13% decreased over the prior-year quarter pre-tax pre-provision earnings resulted in a 3% improvement in our net income wage.

adjusted

Was 92 basis points down from the prior-year quarter of 95 basis points.

Interest income expanded to 10.6 million up $150,000 as a result that interested in, improved to 8.5 million and increase up 210,000.

Won't balance is for the corridor grew 5.3 million improving re over year growth do over 48 million or 6.2%

Like why did you pause it screw and increased $24 million or 4.4% year-over-year?

Expenses were up 800,000 due to higher mortgage commissions and a full quarter of our Title Insurance Agency.

Mortgage origination volume increased this quarter to our robust hundred 1 million up over fifty 1 million or 97% year-over-year.

I said quality metrics were elevated a bit in the quarter due to the decline of an asset-based commercial loan Although our level of 61 basis points of non-performing assets remain strong.

Finally significant progress was made and is being made in processing customer forbearances and paycheck Protection Program loans that will discuss shortly.

We firmly remain committed to our five key strategic initiatives growing and diversifying Revenue more scale to organic growth as well as m&a that we have planned the second quarter of 2012 or more products and services with our 30,000 households excellence and operation and more intimacy with client Communications particularly in these difficult times and lastly asset-quality Revenue diversity.

This quarter mortgage volume and Loan sales gains were up from the prior-year 97% on volume 63% on loan sale game.

However, non-interest income declined to 2.2 million from the prior-year quarter of 3 million due to the mortgage servicing portfolio impairment adjusting for that not interested in coming from the prior-year over 650,000.

Non-interest income the total revenue declined to 20% would have would have improved a 34% when accounting for the impairment.

Our mortgage pipeline continues to be near capacity with over five hundred loans in process or approximately 117 million hour numbers are dead regions of Northwest, Ohio and Northeast Indiana twenty 1 million West Central, Ohio. Finley is 16 million Central, Ohio. Columbus was $69 million in Central, Indiana Indianapolis market for another nine million.

This quarter Mark the one-year anniversary of title joining our company and the results have exceeded our expectations.

B Waters and her team have integrated with our lending staff while they've maintained all of their prior banking client relationships.

We can send it introduced speak to our State Bank commercial clients as appropriate.

With a significant increase we are experiencing and mortgage volume. We certainly anticipate a record-setting second quarter or this newer division of SB Financial.

R. S b a production came in at 1 million with loan sales of 136,000 a rather slow start to the year when compared to both the linked quarter and the year ago quarter with loan same just $79,000 for the last two months. This space was dominated by our participation in the treasury PPP lending program.

The date I know the first phase of the stimulus we have approved over $74 billion in loans to 414 businesses or over 99% of our clients that apply it off all will be funded in a total of 10 days and it might add no backlog.

Interestingly as planned over 95% of our commitments were to existing clients average loan amount 178,000 median level. Just 71,000.

We intend to take advantage of our preferred learning status to prospect for more new clients in the next phase of PPP funding as we have plans underway to potential another $25 million.

We currently have a hundred and thirty three additional applications for six million 248 prospects and 85 clients already in the queue and ready for funding.

desires

or second key initiative more scale

came in the 2020 with a very strong loan pipeline that has been impacted by the current pandemic situation. Although we did grow loans and every month of the quarter. In fact, we were able to add five million to our loan balance is this quarter, but certainly well below our expectations and historical growth levels.

Loan growth from the prior year was up by $48 million or 6%

Or Lima and Columbus regions led the way growing 37% and 16% respectively.

Net interest income increased to eight point five million or 2.5% above the prior year, but flat to the length quarter.

The last that's now stand at one point 1 billion and reflector year-over-year growth of $67 billion or nearly 7%

our deposit base expanded to $864 million up $24 or 3%

You're over a year of deposit growth of 36 million or 4.4% increase.

The need for us to provide more options by which our clients can access our services and their financial assets.

Hasn't made much more evidence in this past quarter.

We have become more flexible and Innovative and how we engage with our clients and the electronic aspect of client servicing engagement and delivery will continue to accelerate.

third deeper relationships more services per household

This quarter outside client calling efforts were rechanneled to phone calls and digital Communications.

And our economy literally shut down. We made a commitment to proactively contact 100% of our commercial clients to insure them that we were prepared to provide for their liquid requirements when called upon

we believe that this proactive calling effort was directly responsible for successful participation in the PPP lending program. I just mentioned

Requirements of the program in terms of documentation quick funding and tight approval window certainly put our commercial teams to the test, but clearly they delivered.

Or dynamic referral process continues to be a differentiator for a company and we reported in Prior quarters this quarter. We added over $22 in new business from 222 closed off.

This is nearly double what we achieved in the first quarter of 2019 and over the last two-plus years one of our better referring quarters.

operational excellence

we got a notable shift in our mortgage business mix in the quarter for all of 2019 the split between internal refinance and new clients to State Bank was Nineteen percent internal 81% new clients off the first quarter of 2020 the percentage of internal refinance expanded to 24% with the month of March coming in at nearly 30%

Given the size of our current pipeline we expect that higher internal refinance volume will continue well into the second quarter.

Pass the the optimization that both are processing locations has been a key Focus as we were incredibly pleased to have been able to originate nearly 500 million and residential real estate loans over the bulb last 4 quarters quite a testament to the hard work done by our Originators, but clearly would not have been possible without support from our back room and our operations staff.

We've increased our servicing portfolio to over $80 loans with principal balance now of 1.2 billion households up 7% balances up 11% from the prior month.

Expensive levels for the quarter up from the prior year, but when adjusted for the additional fifty million and mortgage volume expense growth drops from 9% to 4.

We have implemented a cost reduction plan that includes a number of expense containment initiatives in response to not only the pandemic but the rapid decline in short-term rates reflective of our asset-sensitive balance sheet.

We understand how critical expense control will be in 2020 given the business headwinds were facing.

our fifth and final key initiative asset quality

We have spent considerable time and effort in the quarter and thus far at April responding to our clients needs for assistance and relief from the current business situation. We find ourselves.

We have approved forbearances for our clients and nearly all business lines.

588 loans representing balances of approximately 171000231 and sold Residential Mortgages representing over and balances.

Commercial loans representing over a hundred and seven million in balances and the remainder of 67 loans for 14 million consumer loan balances.

This quarter. We had a spike in charge off due to one asset base and went to We're Alone that we placed on non-accrual for two point three million. We were clearly disappointed about the size of his client had on our historically strong asset quality metrics.

As a result a reserve the non-performing coverage declined to 136% but still above the median of our peer group.

Finally, we have taken an expanded look at new credit terms for businesses and clients as we anticipate the longer terms of effects of a slower growth or no growth economy going forward specifically, we have reduced ltvs on cre deals increased requirements for borrower liquidity to ensure ample debt service coverage, Well assessing and reassessing internal approval requirements. I continue to have great comfort with our historically strong credit approval process, including our dining a loan review schedule.

Now, I'd like to ask Tony Cosentino to provide some more details in color on our quarterly performance, Tony.

Thanks, Mark. And again, good morning everyone for the quarter. We had Gap net income of $681,000 or $0.09 per share as Mark noted. Our earnings were impacted by the two point two million impairment on our mortgage servicing rights and absent that impairment that income would have been two point four million down point four million, which is a 12.8% decrease.

Highlights in the quarter included operating Revenue down 5.6% from the prior year, but up 7.3% When we adjust for the MSR impairment loan of 2.1 million for mortgage small business and Agriculture and margin Revenue was higher by 2.5%

as we break down further the income statement we getting with our margin and interest income as indicated was up from the prior year by 2.5% and flat to the linked quarter.

For average loan yields for the quarter of 4.74% decreased by 16 basis points in the prior-year while overall yield was down 46 basis points off anticipated higher loan growth in the quarter and had been overweight and cash in anticipation of these fundings as well as preparing for any client liquidity needs.

These higher liquidity levels had a downward impact on earnings yield and we expect our mix to improve in the second quarter as we will reduce cash levels and mortgage volume would be a positive mm in while the PPP program will increase the dollars of nym slightly.

On the funding side is expected the quarterly increase and the cost of interest bearing liabilities. We experienced throughout 2019 discontinued this quarter.

For the quarter the rate on our interest bearing liabilities was 1.12% down from the prayer a year by 8 basis points and importantly down from the linked quarter by 30 basis points.

That interest margin at 3.48% was down 33 basis points from the prior year. And as I said, we expect our margin to improve in the coming quarters with higher mortgage fees and continued declines in founding costs.

Total interest expense costs are down by 3% from the prior year, but down 20% from the linked quarter.

An emerging income growth was also driven by loan interest income of 9.9 million, which is up four million or 4% from the prior-year.

Silver non-interest income of 2.2 million was down from the prior-year reflecting the impairment of our mortgage servicing rights and was offset by higher mortgage origination volume.

Adjusting for the impairment not interest income would have been up point seven million or 18%

and the SBA Arena our origination were down from the prior-year with volume of 1 million compared to three million in the prior year quarter.

A results did include a full quarter of revenue from our title agency in compared to the first quarter of 2019 increased Revenue by 3 million.

Second-quarter mortgage production should Eclipse all records for a company. We also expect to improve upon our gain yield is hedge performance will Trend higher with reduced rate volatility expected.

This quarter's real estate volume from new clients was down from historical levels, but still was 76% of total volume total games on sale came in at one point nine million, which was 2.3% on our sold volume of 84.4 million.

Our servicing portfolio of 1.22 billion provide a revenue for the quarter of 756000 and is on Pace to deliver three point 1 million in total revenue in 2020.

The market value of our mortgage servicing rights declined significantly this past quarter calculated fair value of 74 basis points was down $32 and twenty five basis points from the prior year and linked Quarters off. It did result in a 2.2 million impairment.

At March Thirty One hundred twenty or mortgage servicing rights for nine million, which is down 17% for the first quarter of 2019 and down 19% from the linked quarter total impairment current job training is 3.5 million.

Total operating expense in the quarter of 9.4 million.

The eight point eight million or 9% from the prior-year but compared to the linked quarter expenses were down point eight million or 7.6% the higher level of mortgage volume drove compensation higher versus the prior-year in addition to higher medical costs other expense goes from the prior-year was driven by higher digital banking costs as we had more users and some higher legal expenses.

Higher costs related to our mortgage hedging activities as we discussed due to not only the higher volume but also the higher volatility in the secondary Market.

And a full quarter for Peak title compared to the prior-year increased operating expense by 2 million.

That was returned to the balance sheet loan outstandings at March Thirty One stood at 830.8 million, which was 76.3% of the total assets of the company. We had burst of 48.2 million and asset growth of $67 million from the prior-year and we're up 5 million and fifty million respectively from the linked quarter.

Compared to the prior-year loan growth driven by two categories mainly commercial real estate at 34.3 million followed by commercial loans of 15.3.

Pause the levels are up 4.4% from the prior-year as we lessened our aggressiveness on deposit gathering in response to our lower loan originations. Also with our eye on the Eden acquisition off schedule for the second quarter. We will have significant funding surplus of lower-cost core deposits when the transaction closes.

As Mark indicated we were participating fully in the funding facility and we have structured the borrowings to fund the bulk but not all the 74 million in loans. We were prepared to expect that borrowing capacity as needed to fund the second phase of this small business lending facility.

Looking at our Capital position. We finished the quarter 135.9 million, which is up 4.4% 4.4 million, excuse me, or 3.4% from March Thirty One of 2019 month and our Equity to asset ratio stands at 12.5%

In addition to our reported loan balances our clients could draw an additional two hundred million on approved lines and commitments.

In the unlikely event that that would occur or Capital ratios would still be above our internal targets but this successful conversion of our preferred shares in late 2019 tangible Em Up from the prayer year by 18.4 million or 18.4% on a per-share basis tangible book is up a dollar per share from the first quarter of nineteen.

We have been able to buy back a number of shares below Book value this year and we still have shares left under our current authorization.

Regarding asset-quality total non-performing assets of 6.7 million or up 2.4 million from the prior-year but flat to the linked quarter included in our numbers are 8 million and accruing all these restructured loans Elevate our non-performing level by 8 basis points and absent those restructured credits total non-performing ratio would reduce 253 basis.

We understand that certain segments of the economy will have an oversized negative impact from the buyers for our portfolio. We have seventy three million in these at-risk segments off half of which is in the hotel category. However, only 15% of that 73 million is related to restaurants bars and sports facilities off.

going to account

Our overall diverse portfolio concentration levels and appropriate allowance Levels by category. We are cautiously positive regarding credit deterioration provision expense for the quarter was six million up from both the prior year and the linked quarter as Mark indicated. We charged off and asset-based Loan in the quarter of $400,000.

Our absolute level of loan loss allowance at 9 million is up from the Prairie year by 10.3% in our allowance to loan loss percentage has increased from 104 a year ago to 1.08% currently.

Absent the impairment our results were largely in line with expectations in the quarter looking forward. We will see delays in the loan pipeline as our clients have hit pause a bit and potential metric weakness will be offset somewhat by the impact of not only the PPP program but our forbearance activity and as we have also indicated, we were trending toward mortgage origination and mortgage Revenue quarter in Q2.

I'll now I'll turn the call back over tomorrow.

Thank you, Tony.

No doubt, this quarter presented some opportunities as clearly as well as challenges including the servicing portfolio impairment that don't disgust we anticipate that the economy and not in much the same direction as the rest of the country all be at with again slower growth or no growth in the next six months that said we remained quite optimistic commercial mortgage nsba business lines will continue to provide the inertia for more earnings momentum. Well into the second quarter. Also, we just announced an eleven percent increase our common dividend as we sit today. We expect the dividend level would continue are measured Pace upward throughout 2020.

I want to thank all of our more than 250 employees for helping our clients at communities with their everyday financial needs over the past few months. Clearly. Our senior leaders have demonstrated exceptional flexible and Leadership under some pretty difficult times now, I'll turn the call back over to you Carol for additional questions. Thank you Mark. I'd like to remind everyone on the call today that this webcast will be available on our website at Alyssa. We are now ready for our first question.

Thank you. We will now begin the question-and-answer session to ask a question. You may have press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys off to withdraw your question, please press star then to the first question today comes from Brian Martin Montgomery, please go ahead. Hey, good morning guys, I appreciate Tony your comment. They're just about the you know, the industry's and kind of some potential risk or hot, you know, you know topics as far as the hospitality and the restaurant. Can you just give you know a little color on you know, you know how those are trending today and just you know, maybe just kind of get some comfort on maybe, you know loan the values for those jobs in in those those properties just to kind of get a sense for you know, how you think those are going to play out as you as you go through this potential downturn.

Brian just just a couple of comments. John Gaston is with us and rather than

Speculate a bit. If you don't mind, I'd like to ask John to give us some comments with regard to those particular sectors for sure. Sure. So Thursday is your question is and remind me to specific Industries or maybe you didn't cite specific Industries, but we have entered into forbearance agreements with like most banks most all commercial loans one. And as you might imagine we are at 79% of those industries that are considered at risk by our definition by my definition. That's about 75% of our palm of those. It's a bit anecdotal at the moment, but there's been no increase in delinquency and those that they've all been under for Baron's I fully expect that money will begin to see some pressure there the average loan to values to answer one under the prior question. The average is 66% but that average is misleading of those are at Birth.

We have not taken any higher risk loan-to-value business never above eighty certainly. Most of those are going to be in that sixty to seventy percent range and we forecast marginal additional losses from those at Risk Industries, which again is 7 and half percent of our total portfolio.

Okay, and and the biggest, you know, I guess where they sit today. No, no one's they have the forbearance. So the in the I guess they'll the greatest chunks of what's in that portfolio. Is it really just the hotels you said we're half of the portfolio and then you said it was it restaurants are 15% Was that maybe I missed that that was Tony's comment, I guess no. No, that is correct. And and I would just tell you off of the 75 per-cent exactly almost exactly half of hotels of those hotels. We are at an average loan-to-value 56% again average is misleading. There's a couple of very good ones in there two of those of the total hotels, which is the bulk of the 16 million of the 3560. I have not requested forbearance and our if they're assisting cash at the moment and absent a prolonged effect of the virus there in the situation to weather the storm for the next 3 to 6 months, so we have seen zero increase in our dilemma.

As we sit here today understanding that the remaining twenty s a million of hotels are under some level of forbearance mostly, you know, not necessarily because they had to but because they could we have entered into specific negotiations on to I'm aware of the total twelve million dollars which call it 8% of the 7/2 or 75% So you're sucking not quite 1/10 of the 7 and 1/2 at risk. Those hotels one is in India near an airport and one is in Columbus are both well situated depending on travel restrictions lifted to pick this back up.

Gotcha. Okay, and maybe just you know, there was a little bit larger provision this quarter. I guess just as you guys assess the situation. I mean, do you anticipate some Reserve building as you go forward? Just you know, how should we think about you know, is this thing plays out you guys get more more calling from your customers and kind of monitor the situation and we've seen a lot of banks, you know, get pretty proactive as corridors with Reserve building and just kind of wondering how we should think about that for you guys in the in the coming quarters.

and just

Comments, obviously the PPP program as well as forbearances, you know both generally Bittersweet but given the fact that it's bringing substantial damage to our clients and putting them a position to constrain their needed liquidity. We're we're pretty bullish on the loans. We put on our books the last ten years in the bull market that we've had but clearly I know John and I and on our office of strategic management have talked immensely about the potential opportunities that will be presented to us in the PPP program relative to our clients and potential fees that you know, there could be a a certainly a potential conversation of how it is. We may build a future potential stress in our in our portfolio and and John you can clean it up a little better from well. I know I would just add certainly your comments or well-founded as we looked very true.

Which as you know a trouble of largely looking backwards model, our our credit quality has been so good for such a long time that we were somewhat limited but we did make significant adjustments and environment as you might imagine reflective of the current environment. And I think the increase in provision was as much about those changes environmental factors was that specific credit with there was room in the reserves specific credit, but we are certainly keeping our eye on the future and adjusting those environmental factors commensurate with that.

Okay, you know maybe just one on the PPP for a minute. Can you just talk about if you said it was $75 million or so, I think that's what it was, you know kind of what the rate is on that wage you anticipate and just I guess I'm trying to think if it's if it's a 3% rate. I'll let you give the number but if it's a 3% rate that would look like it's a couple of million dollars two million plus on the on the east side. I'm just wondering does do you anticipate kind of bulk of I guess receiving the bulk of that benefit if you will in kind of two and three q and maybe there's some stragglers or just how that comes in but just either the percentage and then be just how you're thinking about it, you know coming into the income statement.

Brian this is Mark. Just one comment from my seat. I have really optimistic about the applications we've taken you know, with the average of 170000 and a median of 71. Yeah, we've clearly told the line on 414 applications that go to where the government had intended which is too small businesses. I just said John I know there's some waited numbers out there as to what it is. Potentially. We might realize on fees on on those 414 bones. Yeah. That is correct, We anticipate some additional guidance. I know some came out yesterday on the the fees and how we apply for those but as Mark said I too am very pleased and in fact, we took the additional step here at State Bank am giving the customers what we knew which unfortunately the ski hasn't been that's been as you know, a hurry program but educating them on what we knew and making sure that our bar was and our lenders dead.

are communicating about the

Expectation of the program they may be where your question was going is we expect by and large just to be completely forgiven. And when we're done with this to have a very small percentage of additional credit that may not be forgiven by the wage. Yeah and Brian I would just add in in terms of you know, as Mark and John both have said in terms of the Forgiveness of the client relative to the seaside dedications and guidance today are that we will get that within ten days of funding. So our expectation is all of our first tranche will be funded Within by end of day today. So I'm anticipating by no later than you know, mid mid mid May at the worst that all those fees would inure to us again, I would suspect as most banks are going to look at Birth relative to their provisions and everything else going forward, you know, and you know based upon our media and our level is probably going to be, you know, three to three and a half percent depending on where we are.

Okay, and if if Tony if those so you start collecting the fees, you know, like you say, you know, if it's May 1st early early like this quarter do if those are only thing out there for 90 days. So, you know, if you think about the split of you know, how much revenue you could get if they're all you know, go away after 90 days, you know, which I understand isn't you know, how long the optimistic Outlook but if if they were to go go away in 90 days with the you know with the bulk of the revenue then be realized in third-quarter. You know, I guess is you kind of think about it. You'll collect some fees, you know for the two months have them in 2 q and then, you know the bulk of that would just you know, have a big spike in third-quarter. Is that how we would think about it? I I I I would be the opposite we would we would we would endure all of the fee sighed in Q2 and then whatever else on the margin side at that sixty to sixty-five years.

Point spread between the one and the 35 ongoing our expectation is 80% of our $75 million will fully get provided and forgiving in the 8th week. So, you know we'll have a an increase in balance is on an average basis that will flow back down by three and four q and Brian one comment. As I said, in fact, we were quite pleased with 95% of our numbers going to known clients that we have. So we've not taken a flyer on anything yet where we've just allowed anybody to come in the front door and do a p p p mean this is this is clearly for small businesses and our clients predominantly that said this next round were looking at taking, you know, just a little bit of bigger bite on the project side because we literally think there are a number of competitors out there. We number one are not prepared to handle the backlog and we think we can marginally move to a little higher level with this new three hundred ten billion that wage.

Got you. Okay. Yeah, there's just a lot of uncertainty a couple of banks have said they would you know, bring that be in you know over you know over a 24 month. So they would start taking in the fee, you know 124th of it and went dead payoff. It would did get the bulk of it. It doesn't sound like maybe that's the way you're thinking about it. So it's until there's more clarity just going to be a a moving moving Target for a lot of people but thank you for the the color of that. So, how about just one Tony just as it relates to the margin and it's there's a lot of moving Parts in there. You know, I guess when you think about you know, the rate the emergency rate Cuts we had you guys long as you kind of mentioned, you know, the the mortgage the mortgage fees that are coming in, you know in the in the next 2 quarters, you know are typically, and then you're you know ability to you know, reducing proactive on the funding side. Just you know, if you kind of boil it down, I guess how are you thinking about, you know, the margin at least in the second quarter, you know today and then just directionally kind of birth.

After you know given, you know, no no real change in the rate environment from where we are.

Yeah, I'm sure Mark will have some commentary, you know as as as as I have indicated in in the comments, you know, we were maybe overly cautious on liquidity off, you know, we weren't really sure what was going to happen with some of our clients and we're expectations were going to go we had as we talked about, you know, two hundred million.

You know our clients have stayed relatively stable and secure and and we felt good about that, but we didn't want to be caught unawares. So we were a little heavy on cash the mix impacted Us in in 1 Q that's going to go away here in the second quarter. You know, we're going to fund the PPP program, you know a portion of that with internal funding and we and we started off lower deposit rates kind of that March one time frame and we've continued to move rates down kind of on a very good Trend. So the bulk of that song show up in 2 q and then I think the the big mortgage pop they're going to have to queue is going to is going to drive and you know as we look at it the increase in earning assets balance was kind of offset a.m. And we kind of got to the same place. We were I think price will get a little better in 2 q and are earning asset balance will come down 15 to 20 million or so because we're not seeing the loan.

Standings we expect and the other the other part to that, Tony does not generally include the 48 million that we anticipate coming from the Eden Aqueduct albeit at most likely was 36 basis points. Probably going to go down dramatically not any better than the thirty five basis points we have with the FED, but it's clearly a lot less than our current marginal cost of funding at one point one two or so, so that'll help us on a a little bit of front and give us a little margin with yes. Yeah. Okay. So the so direct say Tony it should be up in two thousand then it probably gets its up even further in third-quarter absent, you know some something going on with the acquisition of Eden. I mean, I'm not and I'm kind of leaving out the PPP for the moment just looking at you know, kind of the other components so liquidity the funding side you're making changes to but directly up into queue and then maybe even up a little bit more in three Q as you sit today.

I I would concur with that. Yes. That's my art. Okay, perfect. That is helpful. And how about just your update? I guess if you can on or just your outlook page, if you would on on mortgage just kind of where you see kind of production for the year and then you know, the gain on sale, you know bars you and just because your kind of thinking about things today, you know that's changed a little bit this quarter but everything has activity. I'm sure it played a part. So just try and understand that dynamic as we go forward.

Yeah, thanks Brian. This is Mark and remain very bullish on mortgage lending as we indicated. We were on a basic run rate of 500 million. We're currently having conversations with their investigating leading those conversations on how do we prepare ourselves given the markets? We're in of Indianapolis Columbus and all of Northwest Ohio. How do we prepare ourselves to do more with less with more engaged process with new software and potentially working smarter here so that we can do 750 million dead soon here. You think that as rates bottom out the refinancing of our portfolio will begin to subside a bit again as we move into I think the new age or 3/4, but that said we continue to see some improvement on the purchase side. Some of our competitors have announced that they're not doing anything on the purchase side unless there's 20% down.

700 credit bureau we think there's still some opportunity in their old.

So we continue to be quite prudent on how it is. We're doing PCG kind of mortgages as well as Freddie Fannie's. So we're still bullies on the business line, but I I think we'll probably see some decline of refinancing their own portfolio once everyone gets down to 3% And if I might add Brian I think you know Mark spot on in terms of volume. I I think we're going to have as we said a record-setting level in the second quarter based upon what's already closed and what we anticipate in the pipeline and I would say, you know candidly, you know, I've Been Around The Mortgage business a long time. It was one of the tougher pricing markets we've ever seen in terms of secondary in terms of correspondent pricing in terms of what people were getting giving you on the back end up with a product and there were a lot of a lot of lenders that got kind of caught out with bad pricing and you know, we hung in there a little bit but we paid a little bit of price on the head.

And what we backed off on due to volatility, I anticipate rate volatility to significantly subside and we'll start to make a little bit more money on on the same side in on our heads side. So that's why I anticipate that it's going to be much better here in 2 Q one sidebar just one sidebar we have begun to do a little bit more strategic thinking about how it is. We can potentially differentiate how we appraise how we approach pricing in four distinct different markets, which we think will give us a little bit of opportunity to again determine. How do we go out from a five hundred million rate to 750 million all bed with a little bit more of a regional approach to pricing and closing and processing and Ernesto is leading the charge force in in that Arena.

Gotcha. Okay, and I was just going to ask you told me that Mark the gain on sale. Margin. It should maybe think about it being a little bit lower than where it's at today as you go into the next couple of quarters if it was bound 2.3% as we as we sit today and I would expect that to that would be the floor that we would look at going forward. I mean, you know, we were kind of a 2.5 range or Soul before or 2019 all in when we when we look at everything so I would expect will be a little bit better here in in 2 Q. Okay, perfect. That's helpful and off maybe just one more was just on the the cost reduction plan. If you can just give a little bit of a color on I guess the impact or just if we look at the current level of expenses. However, you can talk about that just your expectations for the expenses as you go forward here outside of the you know, the ABS and flows that come with the incentive for mortgage. Just kind of the core the core rate that we're looking at some of the expense standpoint.

yeah, I think you know as we looked at the operating expenses for the quarter obviously, you know relative to the prior-year you have a bit of the noise with much higher mortgage volume and and the peak title in fact, but if we look at the linked quarter, you know, we had some incentive things in in Q4 that that came off the table here the the first quarter of of twenty, you know, we think this is a a relatively solid run rate, you know, I think the

We don't know today what the expectations will be for reopening locations and how customer interaction is going to happen. We just don't know what that level of Cost Containment and or differentiation is going to be we have a sense of what that's going to be and we think we put some things in place relative to compensation and some other things that we think will help us going forward. Yeah Brian from a granular perspective really looking at very very limited changes and compensation. If at all looking at, you know contributions to ESOP looking at incentive plans looking at Travel looking at a marketing looking at a conference expenses, you know, all kinds of things we're looking hard at we put a hiring freeze on to make sure that it's not just business as usual just because somebody was in a position doesn't mean we're going to replace them all dead.

And so we're just as I mentioned several years ago. We were a hundred percent optimistic and no pessimism and eighteen and nineteen. We went to maybe eighty percent optimistic 2000s the Mystic and then coming into 19, maybe a little more pessimistic and now her twenty twenty. I think those thoughts and approaches to business have really found us. Well in terms of where we've landed here now and 2020 all be it in a pandemic that no one expected. So we're just looking at everything on a number of fronts knowingly Thursday. It's probably going to continue to get more difficult, you know, as we move into a no-growth economy and we will clearly see how good we have been at underwriting credits that we think we've been a pretty good at and had a a pretty good process for taking credits two officers loan committee and having four or five people look at the credits before we got involved.

We're cautiously optimistic on you know, where we go in the midst of less activity and constraining expenses in the process.

Gotcha, and you guys made some comments about this loan growth being a little bit, you know slower here which makes a lot of sense and it just is you guys look at you know, the two things, it's just maybe your outlook as you as you think today high-level about 21, you know, what level if you were projecting, you know, whatever level of growth you were thinking in Twenty-One. Are you backing off that number that you were thinking is it was we sit today given what's going on and then he just if you can so that's one and then the second question is just you just comment on the timing of the close of Eden and just how that's proceeding. That's it that I suck.

Yeah, this is Mark. And then John I like ask John for I was just some comments perspective. But you know relative to loan demand as is we've disclosed Brian for I think a number of quarters and several years. We've been elated being at the median level of growth. We've we've never aspired to be at the 75th like we do when everything else in terms of performance, we've been read off that five to seven percent medium-to-high digit single-digit growth in The Lending Arena. So I think that's going to play well to the position. We took twenty. So John we'll have some more comments with regard to Eden or steaming along nicely. The full expectation is that will get that done the second quarter from a financial perspective and integration and then literally in the third quarter from an operational perspective full integration full name change and everything in the middle. And so John Smith.

Comments on that, you know loan demand perspective 20-21. Yep. I I

Free with what Mark said, you know, we have the right people and we're in the right markets we expect to be at that meeting or slightly above median level with some really really key people in those markets and in the right Mark that said what that median level of growth is, you know as we look at third and fourth quarter, that'll be the challenge and and we have realistic expectations of what that might look like, but we expect to Fairfax as well or better than our peers but the great, you know, what the new normal with the new medium. So that'll be the key Brian. What's the new normal New Media? And what's the GDP going to be and where do we have here? And how many more or less programs are left or how many can they they monetize and and going forward? Yeah a lot of a lot of uncertainty so well the and and the the month, you know, the Eden deal was going to take some of that, you know, excess liquidity and put it to work. So I guess it could just change a little bit of the Dynamics or just maybe push it out a little bit depending on the level of growth is probably the way we should wage.

about it

Yeah, I think Brian a high level and you know all this clearly with forbearances and John and I've talked about this with forbearances and PPP. We're going to delay. We'll pay down just by default and if we do that for three to six months and get some regulatory guidance on how far we can go and you add PPP and that and some clients are still taking advantage of the landscape the people that put themselves in a position with the quiddity and have a good business model. We think we we put ourselves in a position to capitalize on whatever small growth is going to be out there. So we remain cautiously optimistic and we hope we can come through this at the end of 2020 looking like we had a pretty good solid model coming into the beginning of the month. Yeah. Okay. Well that all sounds good. Well, I appreciate all the color. Thanks for taking my questions.

Thanks, Brian. You care Brian.

Again, if you have a question, please press * then 1 the next question comes from Tony of Cutler Capital Management, please go ahead.

Good morning, Tony. Hi. Hi, how you doing? I was hoping you could shed some color on the credit stress testing that you've done to your commercial portfolio and what the result of like and if you can include things like unemployment rates and and catfights. That would be helpful. What I can tell you is is we have looked at I mentioned the number 7th of our those are first wave that Risk Industries and we have completed one percent of reviews and all of those as Mark said earlier, you know, we would expect our borrowers if we're doing projects of the weather a short-term storm. And as we see here in April, I think that's what we've seen now we've assessed all those for cash liquidity Capital going forward in terms of wage rates and stress-testing. We have not done that at this moment.

Okay. Thanks. And then if you could provide a little more color on the forbearance.

Program that you're offering is it is it, you know sixty days ninety days for months.

Yeah, I would say with the exception of Freddie Mac that has their own set of rules or has to be a government agency that has their own set of rules on our internal portfolio. We've started with the policy we've done 60-day curtailment waiver on off plans and three months or 90 days of principle largely principal forbearance principal and interest for all categories of loans with the knowledge that three months may not be enough and we'll be assessing that here in probably early may Tony interesting to note. Of course as you're well aware, we have probably a residual portfolio that maybe twenty million John on SBA on our books at a way to deal the 7 plus and recently we did the calculation with a 6 months forbearance coming from SBA. We're going to receive about five hundred to $550,000 per month for 6 months on behalf of our residual portfolio for the clients that we've done SBA Loans on so that's cool.

would be great relief as you're well aware to all of our clients hard to figure out where the government's getting all the money, but we kind of sort of know where they had but that's got to be a positive for our business line that we've been doing for actively five years now, so

Great. Thank you. That's really helpful.

Take care to a question and you?

This concludes our question-and-answer session. I would like to turn the conference back over to Mark line for any closing remarks.

Once again, thanks everyone for joining with us this morning on our first quarter webcast and conference call. We look forward to certainly connecting with you in July for our second-quarter results, which should include the closing of our acquisition Eden State Bank. Thanks for joining and goodbye.

Circumference is now concluded. Thank you for attending today's presentation disconnect.